Insights for Non-Profits

Donors are driven by a variety of motivations when it comes to their charitable giving. Broadly speaking, we view these motivations as either having an emotional appeal (e.g., connections to people or groups, stories, feelings) or a financial appeal (e.g., tax savings, estate planning, personal finances). Fundraising professionals should focus on both when fine tuning their message, as well as understand how these motivations might change for donors over time.

The environment today seems poised for change, particularly in the area of donors’ financial motivations. A big focus recently has been on our new president and what his tax proposals might mean for charitable giving. Should non-profits be worried? The honest answer is that no one knows for sure, but there are measures organizations can take to prepare for possible changes.

The Downside

Generally speaking, lower taxes reduce the benefit of charitable giving. This is because most charitable gifts are tax deductible. During his presidential campaign, President Trump proposed a reduction in the number of tax brackets, a lower maximum tax rate from 39.6% to 33%, an increase in the standard deduction, and eliminating the estate tax, among other proposals.

The Tax Policy Center has an excellent summary of how these provisions might affect taxpayers. For example, lower-income taxpayers may already be more likely to take the standard deduction, and would therefore find their incentives little changed from today. Higher-income taxpayers, however, may be affected as fewer would itemize their deductions. For those who still itemize, lower tax rates overall would provide less of an incentive for charitable giving because the benefit of a charitable deduction would fall from a maximum tax savings of 39.6% to 33% on each dollar gifted.

A similar logic applies to estate taxes. Right now, taxpayers can reduce the size of their estates through charitable gifts and avoid paying taxes on those gifts. A repeal of the estate tax would eliminate that incentive.

The Upside

While President Trump’s proposals could certainly reduce tax incentives for donors, they wouldn’t eliminate them. Giving USA provides data on total charitable gifts in the U.S. dating back to 1973. Over that time, charitable giving as a percent of GDP has ranged anywhere from approximately 1.6% to 2.0%, despite several different tax regimes and deduction rules.

The relative stability of charitable giving has shown that donors’ ability and willingness to give tend to be quite resilient over time. One historical example of a major shakeup in tax policy was the Tax Reform Act of 1986. Among its provisions, this law eliminated charitable deductions for taxpayers that didn’t itemize. The effect in the next year was a small decline in the level of giving by approximately 3.8%, but giving again reached a new all-time high the year following that.

Finally, overall wealth is perhaps an even greater predictor for levels of charitable giving. For example, giving generally falls during recessions. Conversely, studies have shown that individuals are more likely to give if they feel secure in their own personal financial situation. Lower tax rates might reduce giving in the short term, but this could be overcome in the long term to the extent that it strengthens economic prospects.

The Bottom Line

Donors’ motivations to give are complicated and it’s difficult to predict with certainty what the impact of any tax changes might be. We would recommend fundraisers stay aware as more information is available and the potential impact of tax code changes becomes clearer. Taxes are likely to be a priority for Congress this year. We will continue to monitor possible new tax legislation and its impact and keep you updated.

In the meantime, now is an ideal time to reconnect with donors on an emotional level. If your approach has been more heavily focused on the financial benefits of a gift, it may be wise to expand on this by reminding donors of the other benefits their gifts bring. Some organizations choose to take a micro perspective in this regard, focusing on individual success stories. Others focus on crafting a simpler message and delivering it with more emotional force. Techniques might include more face-to-face or event-based communication. Fundraisers with a diversified tool kit may have an advantage regardless of the tax landscape.

For more information on fundraising best practices, download our Fundraising Principles Guidebook.

*The information in this paper is not intended as legal or tax advice.